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UNIVERSITY OF TORONTO
DEPARTMENT OF ECONOMICS

ECO100Y: L0301
Midterm Test #3; February 2, 2010



Time Allowed: 90 Minutes



This total marks in this test are 80. The test is divided into two parts:

Part I Diagrammatic/Equation/Explanation format - is worth 60 marks
(75% of the total marks of 80)

Part II - multiple choice- is worth 20 marks (10 multiple choice questions worth 2 marks each)
(25% of the total mark of 80)


Show your work where applicable.


YOU MUST USE PEN INSTEAD OF PENCIL




Print your name and student number clearly on the front of the exam and on any loose pages.



Name: _______________________________________
(Family Name) (Given Name)


Student #: ______________________





There are 9 pages to the exam


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ECO100Y L0301; Midterm Test #3: February 26, 2010

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Part I: Place your answers (and work where necessary) in the space provided.
Clearly label all axes, curves, and points.

1. Comparative Advantage (10 marks)
The following table gives the resource input needed per unit of output. Assume that these
are the only countries and commodities in the world and that there are no economies of scale
and no transportation costs.
Output Costa Rica Guatemala
Banana unit 3R 5R
Pineapple unit 18R 20R
a) In the space below, determine the country with the comparative advantage in Banana
production and the country with the comparative advantage in Pineapple production. Show
your calculations. (3 marks)

1 mark: Costa Rica: 1 Pineapple costs 18/3 = 6 Bananas (or 1 B cost 1/6 Pineapple)
1 mark: Guatemalat: 1 Pineapple costs 20/5 = 4 Bananas (or 1 B cost 1/4 Pineapple)
1 mark: Costa Rica has comparative advantage in Bananas and Guatemala has it for
Pineapples
b) Suppose that Cost Rica has 3,600 units of the resource and that Guatemala has 4,800 units of
the resource. In the space below, draw each country's production possibility curve in
separate diagrams with Pineapples on the vertical axis. (2 marks)
Costa Rica
Guatemala
1200 960
Pineapple
Pineapple
Bananas
200
1200
CPC
PPC
CPC
PPC
240
240

b)1 mark: correct PPC axes for Costa Rica for B (=3600/3=1200 ) and P (=3600/18 = 200))
1 mark: correct PPC axes for Guatemala for B (=4800/5 = 960)and P (=4800/5 = 240)
Deduct 1 mark if not linear
c)1 mark: correct Costa Rica intercepts: Bananas = 1200 and Pineapples = 240
1 mark: correct Guatemala intercepts: Bananas = 1200 and Pineapples = 240
c) Suppose that these countries exchange 5 unit of Bananas for 1 unit of Pineapple.
i) In your diagram, draw each country's consumption possibility curve with trade.
(2 marks)
ii) If Costa Rica consumes 500 units of Bananas, what is the maximum units of Pineapples
that Costa Rica can consume given trade? Show your work. (1 mark )
1 mark: Costa Rica trades 700 units of Bananas (1200 500) for700/5 = 140 units of Pineapple
iii) If Costa Rica consumes 500 units of Bananas, what is the maximum amount of
Bananas and Pinepples that Guatemala can consume given trade? Show your work.
(2 marks)
1 mark: Guatemala consumes 700 B ( trade from CR)
1 mark: Guatamale consumes 100 P (240 100)
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ECO100Y L0301; Midterm Test #3: February 26, 2010

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2. Prices Indices (10 marks)

February, 2005 February, 2010
Price/unit Quantity Price/unit Quantity
TTC Tickets $2.25 60 $3.00 40
Cell Phone Minutes $0.25 140 $0.15 260
The above table gives data for the price/unit and quantity of TTC tickets and Cell Phone
minutes purchased by the average student in January, 2005, and January, 2010. Assuming
that 2005 is the base year, calculate the following values.

a) Nominal student consumption in 2010 (1 mark)

1 mark: answer = from some work such as 3*40 + 0.15*260= 159

b) The GDP deflator for 2010 given 2005 as the base year to the nearest decimal. (2 marks)

1 mark: numerator = 3*40 + 0.15*260 = 159 or denominator = 2.25*40 + 0.25*260 = 155
1 mark: correct answer = 102.58 from 100* 159/155 (accept 102.6 or 103))



c) Real consumption in 2010 according to the GDP deflator to the nearest decimal. (1 mark)

1 mark: 155 from either 100*159/102.58 or 2.25*40 + 0.25*260


d) The Consumer Price Index (CPI) for 2010 to the nearest decimal. (2 marks)

1 mark: numerator: 3*60 + 0.15*140 = 201 or denominator: 2.25*60 + 0.25*140 = 170
1 mark: correct answer = 118.2 from 100*201/170 (accept 118)



e) Real Consumption in 2010 according to the CPI to the nearest decimal. (2 marks)

1 mark: set up: 100*159/118.2
1 mark: correct answer = 134.5 (accept 134.4)

f) The amount of Inflation between 2005 and 2010 relative to 2005 using CPI. (1 mark)

1 mark: 18.2% (accept 18)

g) Real student income in 2010 using the GDP deflator if nominal student income was $1,800 in
2010. (1 mark)
1 mark: = $1,754.73 from 1800/102.58 (accept 1,754 or 1,755)
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ECO100Y L0301; Midterm Test #3: February 26, 2010

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3. National Accounts (10 marks)
Canada's national accounts, on a domestic basis, for 2000 ($ Billions).
Corporate Profits before Taxes 150
Investment (Gross) 193
Net Investment Income of Non-Residents 26
Government Spending 229
Wages, Salaries, and Supplementary Labour Income 558
Personal Savings 78
Government Transfer Payments 70
Capital Consumption Allowances (Depreciation) 141
Consumption 608
Net Income of Unincorporated Businesses (Farm and non-Farm) and Rent 67
Interest and Miscellaneous Investment Income 56
Imports 440
Corporate Taxes 40
Personal Taxes 120
Indirect Taxes less Subsidies 130
Exports 512
Dividends (Distributed Corporate Profits) 55
Calculate (Show your work)
a) Net Domestic Income calculated from factor cost (i.e., from incomes). (2 marks)
1 mark: correct except for one number
1 mark: correct answer: 558 + 150 + 67 + 56 = 831
b) Gross Domestic Product calculated from Net Domestic Income (1 mark)
1 mark: correct answer: 831 + 130 + 141 = 1,102

c) Gross Domestic Product as Aggregate Expenditure (2 marks)
1 mark: correct exact for one number
1 mark: correct answer: 608 + 193 + 229 + 512 440 =1,102
d) Net Domestic Product (1 mark)
1 mark: 961 from either 1,102 141 or 831 + 130

e) Disposable Income from the components of Disposable Income (1 mark)
1 mark: 686 from 608 + 78

f) Personal Income from Disposable Income (1 mark)
1 mark: 806 from + 120

g) Gross National Product (1 mark)
1 mark: 1,076 frm 1,102 26

h) Personal Income from Net Domestic Income (1 mark)
1 mark: correct:= 806 from something like 831 40 55 + 70
(Dividends is a typo but 55 is also retained earnings from 150 40 55)

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ECO100Y L0301; Midterm Test #3: February 26, 2010

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4. MacroModel (10 Marks)

An economy has the following set of macroeconomic equations.

Consumption: C = 162 + 0.8Yd Net Taxes T = 0.3Y
Investment: I = 30 + 0.14Y Exports X = 230
Government Spending: G = 370 Imports IM = 20 + 0.1Y

a) What is the Consumption equation as a function of Y (not Yd)? (1 mark)


1 mark: C = 162 + 0.56Yd from something like 162 + 0.8(Y (0.3Y)


b) What is the Aggregate Expenditure equation? (2 marks)


1 mark: correct Autonomous part = 772 from AE = C + I + G + X - IM
1 mark: correct Marginal part = 0.6 from AE = 772+ 0.6Y



c) Calculate the value of Autonomous Spending Multiplier. (1 mark)

1 mark: = 2.5 from something like 1/(1 0.6)

d) Calculate the value of Equilibrium Income. (2 marks)

1 mark: setup = 772/(1 0.6) (or something consistent with their AE equation
1 mark: Y = 1,930 from AE = Y or 772/(1 0.6)



e) Calculate Consumption at equilibrium. (1 mark)

1 mark: C =1,242.8 from 162 + 0.56*1930 (or from 0.8 of calculated Yd)

f) Calculate Net Exports at Equilibrium. (1 mark)

1 mark: X IM = 17 from 230 (20 + 0.1*1930) must be negative


g) What is the Change in Inventories at Y = 2,000?. (2 marks)
1 mark: correct AE = 772 + 0.6*2,000 = 1,972 (or something to get correct answer)
1 mark: Change in Inventories = 2000 1,972 = +28
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ECO100Y L0301; Midterm Test #3: February 26, 2010

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5. Autonomous and Fixed Tax Multipliers. (5 marks)

The following are a countrys equations for Consumption, Taxes, and Aggregate
Expenditure.
C = 450 + 0.8Yd T = -10 + 0.2Y AE = 2,400 + 0.75Y

a) What is the change in Exports necessary to increase equilibrium GDP by 50 ceteris paribus?
(1 mark)
1 mark: = 12.5 from 50/(1-0.75) or 50/4

b) What is the change in the government budget (surplus (+)/deficit (-) given an increase in
Government Spending = +10? (2 marks)
1 mark: set-up = 0.2*Change Y 10
1 mark: = -2 from 0.2(10/(1 0.75) 10

c) What is the Fixed Tax Multiplier? (1 mark)
1 mark: = -3.2 from 0.8/(1 0.75) or 0.8*4 (must be negative)

d) What is the change in equilibrium GDP given an decrease in Fixed taxes of 25 (-25) ceteris
paribus? (1 mark)
1 mark: =+80 from 3.2 * (-25) (must not be negative)

6. Money Supply (5 marks)
Assume for all parts of this question that the following conditions hold in Canadas banking
system: deposits are all demand deposits; all banks are chartered banks; there are neither
excess reserves nor excess circulation; and banks loan, rather than buy securities, with
excess reserves.
A) Assume that the only items on the balance sheet of the Canadian (Private) Banking system
are Reserves = $30 billion, Loans = $170 billion, Deposits = $200 billion, and that the
(required/target) reserve ratio = 0.125 (12.5%).
a) What are reserves at equilibrium? (1 mark)
1 mark: = $30 b
b) What are Deposits at equilibrium? (1 mark)
1 mark: = $240b from 30/0.125
B) Ignore Part A. Assume that the required reserve ratio for deposits is 0.05 (5%). Suppose
that the Bank of Canada has an outstanding note issue of $62 billion and Currency in
Circulation is $47 billion (assume no chartered bank deposits at the Bank of Canada).
a) What are deposits at equilibrium given the above information? (1 mark)
1 mark: = 15b/0.05= $300b

d) What is the amount of loans at equilibrium given the above information? (1 mark)
1 mark: 300 - 15 = 285 (Accept anything consistent with their Deposits Loans)

e) What is the money supply at equilibrium given the above information? (1 mark)
1 mark = 47 + 15/0.05 = 347 b (Accept 47 + their answer for deposits)
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ECO100Y L0301; Midterm Test #3: February 26, 2010

- 7/9 -
7. Explanations (10 marks)

a) Why is the Income measure always theoretically equal to the Expenditure measure in the
National Accounts? (1 mark)

1 mark: Change in Inventories included


b) What is Says Law? Why is Income always equal to Expenditure for Say (and the classical
economists)? (2 marks)


1 mark: Supply creates its own Demand

1 mark: Because prices adjust so that all goods sell (and all Income is spent)


c) What is NAIRU? What does NAIRU measure? (2 marks)


1 mark: Non-accelerating Inflation rate of unemployment

1 mark: measure natural rate of unemployment (or unemployment at Potential GDP or full
employment or anything else that conveys the full employment idea such as anything greater
than structural and frictional unemployment)


d) Whats the difference between Expansion and Recover in business cycle analysis? (2 marks)


1 mark: expansion it the period between trough and peak (or something conveying the idea)

1 mark: recovery is the period from trough to the height of the previous peak


e) Why is the Short-run Supply function of the firm positively sloped in the short-run?
(3 marks)

1 mark: Short-run Supply is MC

1 mark: MC is the inverse of MC (W/MP)

1 mark: MP eventually diminishes because capital is fixed [must have K is fixed]


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ECO100Y L0301; Midterm Test #3: February 26, 2010

- 8/9 -
Part II: Multiple Choice
Circle the best answer
Each question is worth 2 marks. No marks deducted for wrong answers.
.
1. Which of the following did not happen in the last few months?
a) U.S. GDP grew over 4% in the fourth quarter of 2009
b) U.S. employment fell in every month of 2009
c) Canadian employment rose from November, 2009, to January, 2010
d) U.S. and Canadian prices have fallen slightly over the last few months.
e) none of the above

2. Suppose that the a country has an Adult Population of 25 million, unemployment of 1.2
million, and an Unemployment rate of 7.5%. What is the participation rate?
a) 55% b) 58% c) 60% d) 61% e) 62% f) 63% g) 64%
h) 65% i) 66% j) 67% k) 68% l) 70% m) none of the above

3. U.S. employment fell by 20,000 jobs in January, 2010. Which of the following was true?
a) U.S. unemployment increased because employment decreased
b) U.S. unemployment decreased because the number of discouraged workers increased
c) The U.S. unemployment rate didnt change since employment fell very little
d) The U.S. unemployment rate rose slightly due to the decrease in employment
e) The U.S. unemployment rate fell because the participation rate increased
f) none of the above

4. Suppose that you can cook 0.75 meals or clean 0.3 rooms in a half hour and that your
roommate can cook 0.6 meals or clean 0.2 rooms in a half hour. Which of the following
would benefit you both according to our theory of comparative advantage?
a) You trade 1 meal for 2.25 clean rooms by your roomate
b) You trade 1 meal for 2.75 clean rooms by your roomate
c) You trade 1 meal for 3.25 clean rooms by your roomate
d) Your roommate trades 1 meal for 2.5 clean rooms by you
e) Your roommate trades 1 meal for 2.75 clean rooms by you
f) Your roommate trades 1 meal for 3.25 clean rooms by you
g) none of the above

5. Supppose that Canada produces gasoline from our own crude oil. Which of the following is
true in the short-run (i.e., the microeconomics short-run) given an increase in the price of
crude oil due to a shortage of quantity supplied?
a) The CPI and GDP deflator will not change
b) The CPI and GDP deflator will rise by approximately the same amount
c) The CPI will rise more than the GDP deflator
d) The CPI will rise less than the GDP deflator
e) The CPI will fall while the GDP deflator will rise
f) none of the above

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ECO100Y L0301; Midterm Test #3: February 26, 2010

- 9/9 -
6. Suppose that a house built in 2009 was first sold in 2010 to a household. Which of the
following is true for 2010?
a) GDP increases by one house
b) Consumption increases by one house
c) Investment increases by one house
d) Consumption increases by one house and Inventories fall by one house
e) Investment increases by one house and Inventories fall by one house
f) none of the above

7. Which of the following is not necessarily true at equilibrium GDP?
a) GDP = Y b) GDP = AE
c) Y = AE d) Net Taxes = Government Spending
e) Change in Inventories is zero f) None of the above

8. A government has a deficit during recession. Which of the following is true for the budget if
employment increases in the expansion following recession ceteris paribus?
a) The deficit decreases because taxes decrease more than transfer payments increase
b) The deficit decreases because taxes increase more than transfer payments increase
c) The deficit decreases because taxes increase and transfer payments decrease
d) The deficit increases because taxes decrease more than transfer payments decrease
e) The deficit increases because taxes increase more than transfer payments increase
f) The deficit increases because taxes increase and transfer payments decrease
g) None of the above

9. Suppose that the government cuts spending on universities (G) to finance an equal increase
in unemployment insurance (UE) during the recession.
i) What is the equilibrium effect on GDP of this fall in G equal to the rise in UE? (1 mark)
a) Fall in GDP b) No change in GDP c) Rise in GDP d) None of the above

ii) What is the equilibrium effect on the governments budget surplus/deficit of this fall in G
equal to the rise in UE? (1 mark)
a) Budget balance worsens (i.e., surplus decreases or deficit increases)
b) Budget balance doesnt changes (i.e., no change in surplus or deficit)
c) Budget balance improves (i.e., surplus increases or deficit decreases)
d) None of the above

10. What are the short-run and long-run equilibrium effects of an increase in Fixed Costs on the
output of the perfectly competitive firm (micro question)?
a) Decrease in firm output in the short-run and decrease in firm output in the long-run
b) Decrease in firm output in the short-run and increase in firm output in the long-run
c) No change in firm output in the short-run and decrease in firm output in the long-run
d) No change in firm output in the short-run and increase in firm output in the long-run
e) Increase in firm output in the short-run and decrease in firm output in the long-run
f) Increase in firm output in the short-run and increase in firm output in the long-run
g) None of the above
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